Housing crunch rages on
Global crisis still has hold on lending market
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By Peter Hirschfeld Vermont Press Bureau - Published: November 22, 2009
A global credit crisis is creating local consequences as aspiring homeowners of modest means find it increasingly difficult to secure home mortgages.
The Vermont Housing Finance Agency, a state-chartered lending institution created to help low- and moderate-income residents achieve the dream of homeownership, has seen its lending capacity shrink dramatically in the wake of a housing debacle that soured Wall Street investors on mortgage-backed bonds.
In fiscal year 2008, the VHFA flourished as a leading backer of single-family home purchases, buying more than $124 million worth of mortgage loans to support the purchase of 865 homes.
As credit markets constricted, however, so did VHFA's access to capital. In fiscal year 2009, the agency was able to back only $37.5 million in home mortgage loans for 287 houses. For would-be homeowners, affordable housing experts say, the dramatic decrease in lending capacity has made it exceedingly difficult to get many lower-income residents into houses.
"VHFA's ability to make loans to first-time homebuyers — one of the main staples to support affordable housing — totally depends on their ability to secure short- and long-term financing," says Erhard Mahnke, coordinator at the Vermont Affordable Housing Coalition. "We've been concerned ever since it became very, very clear that VHFA, and quite a few other HFAs around the country, through no fault of their own, were ensnared in the global financial meltdown."
Sarah Carpenter, executive director of the VHFA, says the agency's inability to secure capital has impaired the affordable-housing mission for which it as founded.
"What happened when the credit markets came to a screeching halt was that yields got turned upside-down, on their heads," Carpenter says. "There was a pull back in the credit market against long-term investments. People got skittish. They didn't want to put money in that long, and in particular people got nervous with things that had housing in them."
That presented a problem for VHFA, which accesses new capital by selling tax-exempt bonds backed by 30-year mortgages. The ability to sell tax-exempt bonds is what separates the VHFA, and other housing-finance agencies across the country, from conventional lenders.
"There has always been a spread between what we have to pay our investors and what another lender might pay," Carpenter says. "And because of that, we can generally be a point or a half-point below conventional rates."
Scorched credit markets have eliminated the VHFA's ability to offer lower-than-conventional interest rates, further complicating the financial picture for lower-income homebuyers.
"I think it's diminished our ability to serve those low-income homebuyers that are our mission to serve," Carpenter says. "In the big picture, it's meant less opportunity for Vermont borrowers."
VHFA's financial struggles have trickled down to local "homeownership centers," where affordable-housing counselors seek to partner would-be homebuyers with mortgage opportunities. Liz Curry is the resource developer for NeighborWorks Alliance of Vermont, a network of five regional nonprofit housing organizations formed to improve and expand homeownership opportunities for Vermonters.
She says the VHFA was, until its recent troubles, a key partner in the majority of home transactions the Alliance facilitated. The agency's decreased lending profile, she says, has had a serious impact.
"As soon as the capital markets crashed, it was just like a proverbial giant sucking sound," Curry says. "Everybody who had been waiting for a home couldn't get (a) mortgage all of sudden, so it's been a very big crunch."
She says the prominence of VHFA on the state's affordable-housing scene has made their struggles difficult to absorb.
"VHFA was our number one partner … for affordable housing. They could use their bond proceeds on Wall Street to enable them to offer a product, and conventional lenders could then originate the loan with almost no risk," Curry says. "Once the bond market dried up, it was this domino effect where if VHFA was out of luck, then their partners are out of luck and we're out of luck. Instead of getting a mortgage in 30 to 60 days, people have to wait four to six months to find a product they could fit in."
The liquidity crunch, Curry says, has eliminated would-be buyers from a market that formerly welcomed them with open arms.
"It's really all about the trickling down of limitations on underwriting," she says. "When people go to apply for loan now they really have to fit in a much smaller box in terms of credit scores and savings for down payments … We're in a time when those limitations are really keeping a lot of people from getting a mortgage."
Mahnke says VHFA supports affordable housing in other ways as well. In the past, VHFA has provided grants to homeownership centers around Vermont totaling more than $200,000 annually. The agency's financial troubles have meant cuts to the grant-funded programs, which give lower-income Vermonters access to counseling services and finance professionals.
"It's just been horrendous for them," Mahnke says. "They no longer have the staff to deal with demand for counseling services."
The VHFA has had to tighten belts internally,as well. Carpenter says she's laid off four employees over the past year — about 10 percent of the total staff.
Carpenter and others count VHFA as a collateral victim of a crisis not of its doing. VHFA's portfolio, Carpenter says, shows a track record of responsible lending that should make its bonds an attractive investment. According to an independent analysis, property values for VHFA's portfolio have risen from $605.4 million to $750.4 million, up 24 percent from the time of loan origination.
And the default rate on VHFA loans remains below the national average. In the month of October, about 3.9 percent of the 3,946 loans in VHFA's single-family housing program were either in foreclosure or more than two months past due. Nationally, according to the Mortgage Bankers Association, 14 percent of home loans were either past due or in foreclosure in the third quarter of 2009.
"We've been caught in a crossfire of what was some bad housing investments around the country," Carpenter says. "We're just little chunk, but we've been swept into the vortex of the whole thing."
Carpenter says there's hope on the horizon.
As HFAs struggle nationwide, the Obama administration has directed the U.S. Department of the Treasury to intervene. A two-pronged plan, announced in late October, would create a bond-purchase program to support new lending by HFAs. Treasury would additionally institute a temporary credit and liquidity program to inject capital into HFAs that have been unable to sell their outstanding bonds.
"I'm forever the optimist," Carpenter says. "The program we're looking at and hoping to get an opportunity for by the end of the year is still a work in progress. But I think it will give us a modest opportunity to get back in the market."
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